The rupee pared its initial losses and settled for the day on a positive note, higher by 1 paisa to close at 86.56 (provisional) against the US dollar on Wednesday, supported by positive domestic markets, while a strong US dollar and a recovery in crude oil prices capped sharp gains.
Forex traders said the US dollar gained on expectations of a no rate cut by the Fed in its Federal Open Market Committee (FOMC) decision. Besides, global risk sentiments were dampened amid tariff threats by the US President Donald Trump, they said.
At the interbank foreign exchange, the rupee opened on a weak note at 86.58, and during the day touched a high of 86.49 and a low of 86.61 against the American currency.
The local unit settled on a positive note at 86.56 (provisional), registering a rise of 1 paisa over its previous close.
On Tuesday, the rupee depreciated 26 paise to close at 86.57 against the US dollar.
"We expect the rupee to trade with negative bias on underlying strength in the US dollar and persistent foreign fund outflows. Importer demand for dollars towards the end of the month and uncertainty over tariffs by the US administration may further pressure the rupee," Anuj Choudhary -- Research Analyst at Mirae Asset Sharekhan -- said.
"However, any central bank intervention may support the rupee. Investors may remain cautious ahead of the FOMC meeting outcome. RBI's announcement of the OMO may also support the rupee at lower levels," Choudhary added.
Meanwhile, the dollar index, which gauges the greenback's strength against a basket of six currencies, was trading 0.23 per cent higher at 108.11.
Brent crude, the global oil benchmark, fell 0.98 per cent to USD 76.73 per barrel in futures trade.
In the domestic equity market, the 30-share BSE Sensex settled 631.55 points, or 0.83 per cent, up at 76,532.96 points, while the Nifty rose 205.85 points, or 0.9 per cent, to close at 23,163.10 points.
Foreign institutional investors (FIIs) offloaded equities worth Rs 4,920.69 crore in the capital markets on net basis on Tuesday, according to exchange data.
Traders further said the Reserve Bank of India's (RBI's) announcement of the open market operations (OMO) may also support the rupee at lower levels.
As part of its over Rs 1.5 lakh crore liquidity injection into the banking system, the RBI on Tuesday said it will conduct a USD/INR buy-sell swap auction of USD 5 billion (about Rs 43,000 crore) on January 31.
The RBI had announced OMO purchase auctions of government bonds aggregating Rs 60,000 crore, variable rate repo (VRR) auction of Rs 50,000 crore and foreign exchange swap of USD 5 billion.
The decision on liquidity injections comes days ahead of the RBI's next bi-monthly monetary policy in which the Monetary Policy Committee may opt for a reduction in the benchmark lending rate.
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